THE FEDERAL Reserve’s 2016 Survey of Consumer Finances found that 65.7% of homeowners had a mortgage or other debt that was secured by their home. That isn’t surprising, given how much homes cost. It also isn’t especially alarming: A mortgage is typically the cheapest way for most folks to borrow. Because your home is collateral for the loan, the interest rate will usually be low—and it’s even lower once you figure in the tax deduction.
Could you trim your cost further? The larger your house down payment, the lower your rate will potentially be. A larger down payment may also either reduce the cost of private mortgage insurance or, if you put down 20% or more, allow you to avoid it entirely. In addition, in the months leading up to your mortgage application, you might check your credit report for errors and work to raise your credit score, so you qualify for a preferential rate.
It’s possible to lower the rate on a new mortgage by paying points. Each point is equal to 1% of the loan’s value, so paying one point on a $200,000 loan would cost you $2,000. A smart move? Paying points might look like a big money saver if you keep the loan for 15 or 30 years. But there’s a good chance you will refinance or move long before then, so paying points may not make financial sense. According to a 2017 report from the National Association of Realtors, recent home sellers had typically owned their property for 10 years—and presumably many had refinanced once or more during the time they owned their homes.
You can also lower your rate, perhaps by a quarter percentage point, by opting for a 15-year mortgage rather than the standard 30-year variety. You’ll still end up with a higher monthly payment, because you are repaying the loan in half the time. Nonetheless, it’s an option worth exploring, because the increased monthly payment might be manageable—and you’ll be mortgage-free after just 15 years.
In addition, you could cut your initial mortgage rate by skipping a fixed-rate mortgage and instead opting for an adjustable-rate loan. But that comes with extra risk.
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